UPDATE 1-Nu Skin to halt China distributor recruitment after probe

Reuters Staff

3 Min Read

Jan 21 (Reuters) - Skincare products maker Nu Skin Enterprises Inc said it would suspend promotional meetings in China where it recruits new distributors, days after Chinese regulators launched investigations into its business practices.

An internal investigation found that some distributors had failed to adequately follow and enforce the company’s policies and regulations, Nu Skin said in a letter to its customers on Tuesday.

“We sincerely apologize for these unfortunate and unauthorized activities.”

The company also said it would take corrective actions, including further training of its employees in China.

Chinese regulators started investigations into Nu Skin last week after local media accused it the company of exaggerating its influence and creditworthiness in brochures and organizing “brainwashing” gatherings.

Nu Skin’s shares lost a third of their value on Thursday, after news of the investigation broke. Shares of Herbalife Ltd , which has a business model similar to Nu Skin, fell 10 percent the same day.

Short sellers and critics have accused companies such as Nu Skin and Herbalife of running illegal pyramid-type schemes, questioning their distribution model where distributors make money not only from their own sales, but also from those they recruit to become distributors themselves.

Activist investor Bill Ackman accused Herbalife of running a pyramid scheme in 2012 and took a $1 billion short position in the company. Herbalife has vehemently denied Ackman’s claim that it’s operating a pyramid scheme.

Nu Skin said on Tuesday it would continue to sell products through its existing distributors in China. It would also extend its product refund policy to them.

The company allows distributors to return products within 12 months of purchase for a refund after deducting 10 percent of the cost as restocking fee, according to a regulatory filing.

Nu Skin also said its training will now aim at stopping sales executives from inaccurately attributing endorsements to public figures or media reports, exaggerating product claims and improperly describing Nu Skin’s business model in China.

Provo, Utah-based Nu Skin’s Shares were up 1 percent at $80.37 on the New York Stock Exchange on Tuesday.